Another Fab Diet

It's not just middle-aged people that are trying to lose weight. Semiconductor manufacturer Atmel (Nasdaq: ATML  ) has been aiming to trim the fat lately, too. Last week, it announced the sale of a wafer fabrication facility in North Tyneside, U.K., which brings it closer to its goal of streamlining its operations.

The North Tyneside facility was sold to Taiwan Semiconductor Manufacturing Company (NYSE: TSM  ) and Highbridge Business Park for $124 million. Perhaps unsurprisingly, Taiwan Semiconductor has bought the wafer fab equipment while leaving the actual building and real estate to Highbridge. By jettisoning this fab, Atmel will reduce its debt by $35 million, reduce future capital expenditures, and increase its ability to utilize other facilities more fully. Anyone else think these things should be beneficial to Atmel's margins?

But that's not all ...

This sale is part of a larger strategy -- the company also announced the sale of a facility in Irving, Texas, in May -- to move to what is called a "fab-light" business model. This means that, while Atmel will continue to run some of its own manufacturing operations, it will farm out a portion of its production to other companies. By doing so, it is following in the footsteps of other semiconductor companies like Texas Instruments (NYSE: TXN  ) .

So why are semiconductor manufacturers going fab-light?

Well, it turns out that converting to a fab-light operation gives another big benefit besides lower capex requirements. A company that contracts out a portion of its manufacturing may be able to bring that manufacturing back in-house in the event of a slowdown. This helps a business maintain its margins during downturns, which is a big advantage in a cyclical, capital-intensive industry like semiconductor manufacturing.

Obviously the semiconductor foundries are beneficiaries as well. Companies like Taiwan Semiconductor and United Microelectronics (NYSE: UMC  ) exist to manufacture chips for others that decide they should no longer go it alone. Thanks to the spiraling cost of modern chip fabs (several billion dollars), this is one trend that should have legs.

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